Equity financing Flashcards
What is venture capital?
Equity investment in new private companies
Most new companies initially rely on:
- Family funds
- Bank loans
Equity investment provided by wealthy individuals are known as:
Angel investors
Many adolescent companies raise money from:
Specialist venture capital firms
What do venture capital firms do?
- Pool funds from a variety of investors
- Seek out promising start up companies
- Finance the firm’s operation
- Work with the companies as they grow
Are venture capital firms passive investors?
No
What are two non monetary benefits that venture capital firms can offer?
Advice, experience and contracts
Most venture capital funds are organised as:
Limited private partnerships
In VC firms, pension/mutual funds and other wealthy private investors are the:
Limited partners
The management company of the venture capital firm is the:
General partner
What are the two parts of a VC’s typical investment policy?
- Accept high uncertainty
- Identify failed investments early and accept loss
What are two ways for VCs to cash in on their investment?
- Sell shares to a larger firm directly
- Sell shares when the firm becomes public
What is a primary offering?
New shares sold to raise additional cash
What is a secondary offering?
Existing shareholders can cash in by selling part of their equity holdings
What are underwriters?
Firms that buy an issue of securities from a company and resell it to the public, and provide advice
What is a registration statement?
document needed for approval by the stock exchange operator during the beginning stage of an IPO
What are the two pieces of information on a registration statement?
- Firm’s history and existing situation
- The proposed projects intended to be financed with the funds raised
What are the 5 stages of an IPO?
- Registration statement
- Prospectus
- Road show
- Book building
- Issue price
What is a road show?
Talk to potential investors to get an idea of how much stock they wish to purchase and for how much
What is book building?
Build a book of likely orders and use this information to set issue price
What are three IPO costs?
- Spread
- Admin costs
- Direct costs
What is ‘spread’ in an IPO?
Difference between the price that the underwriter buys the new issue, and the price it is offered to the public
What are examples of admin costs in an IPO?
- Legal counsel
- Financial advisers
- Accountants
What are direct costs in an IPO?
- Mailing
- Printing
Underpricing occurs when:
A new stock has an issue price below the “true” or “fair” valuation of the company’s share
What is one reason to underprice new issues?
Realising better returns once the stock price rises
What is the ‘winners curse’?
The idea that if an investor can easily buy all the stock at issue, then they may have overpaid
What are two types of stock issues after the original IPO?
- General cash offer
- Rights issue
What is a general cash offer?
Sale of securities open to all investors by an already public company
What is a seasoned offering?
Sale of securities by a firm that is already publicly traded
What is a shelf registration?
A procedure that allows firms to file one registration statement for several issues of the same security
What are foreign bonds?
Companies issue bonds in another country’s domestic currency
What are eurobonds?
Bonds underwritten by a group of international banks
What are global bonds?
Bonds where one part is sold in the euro bond market and the remainder sold in the company’s domestic market
What is a rights issue?
Issue of securities offered first or only to current stockholders
